October 17th, 2006

Ascending Triangles and CBOT

I my last post, I wrote about how the ascending triangle pattern and Open Solutions (OPEN) presaged the company’s acquisition. I don’t know what it is about this chart pattern but, from my experience, consolidations of this type appear to be the most reliable for extended or significant upside price movement when the resistance represented by the top of the triangle is ultimately breached.

Confidence in the pattern’s veracity is increased when it’s unwinding formation is translated into the struggle between buyers and sellers, between supply and demand. Strong accummulation continues up to a “buy limit” (the upper trendline) after which it is withheld and a new supply flow drives the price back down to the “buy trigger” level (as represented by the upward sloping trendline across the triangle’s bottom).

Frequently, demand is in perfect balance with supply so, rather than an upward sloping trendline depicting increasingly absorbed supply, the trendline remains horizontal and a channel pattern is formed rather than an ascending triangle. These patterns are less reliable since it is uncertain which force, supply or demand ultimately will prevail causing the final breakout.

As chartists and technicians, we’re trully not interested in the reason these patterns form …. we’ll let those interested in the fundamentals give expound on the explanations after the fact, after it’s too late to act on the information. We’re only concerned that, based on price and volume action, something is happening behind the scene that, with a high probability, frequently leads to significant or sustained upward price movement.

Since starting this blog, I’ve given many examples of breakouts from triangles and channels, including:

The next day, it happened again. I purchased Chicago Board of Trade (BOT) a couple of weeks ago based on the ascending triangle it formed over the past 12 months. Market conditions were favorable and most stocks in the Industry Group were in favor and being accummulated:

And on Tuesday, BOT announced that it was being acquired by the Chicago Mercantile Exchange (CME) and the stock popped 17.5 points, or 13%!

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